56-3-302 - Part definitions.
56-3-302. Part definitions.
As used in this part:
(1) Acceptable collateral means:
(A) As to securities lending transactions, and for the purpose of calculating counterparty exposure amount, cash, cash equivalents, letters of credit, direct obligations of, or securities that are fully guaranteed as to principal and interest by, the government of the United States, or by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, and as to lending foreign securities, sovereign debt rated NAIC-SVO 1; and
(B) As to repurchase transactions and reverse repurchase transactions, cash, cash equivalents, letters of credit, direct obligations of, or securities that are fully guaranteed as to principal and interest by, the government of the United States, or by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation;
(2) Admitted assets means assets permitted to be reported as admitted assets on the statutory financial statement of the insurer most recently required to be filed with the commissioner, but:
(A) Excluding the assets of separate accounts, the investments of which are not subject to this part;
(B) (i) The amount of the liability recorded on the insurer's statutory balance sheet for:
(a) The return of acceptable collateral received in a reverse repurchase transaction or a securities lending transaction; and
(b) Cash received in a dollar roll transaction;
(ii) Shall be deducted from the insurer's admitted assets for the purpose of calculating any limitation in this part that is based upon admitted assets;
(3) Affiliate means, as to any person, another person that, directly or indirectly through one (1) or more intermediaries, controls, is controlled by, or is under common control with the person;
(4) Business entity includes a sole proprietorship, corporation, limited liability company, association, general or limited partnership, joint stock company, joint venture, mutual fund, bank, trust, real estate investment trust, joint tenancy or other similar form of business organization, whether organized for-profit or not-for-profit;
(5) Cap means an agreement obligating the seller to make payments to the buyer with each payment based on the amount by which a reference price or level or the performance or value of one (1) or more underlying interests exceeds a predetermined number, sometimes called the strike rate or strike price;
(6) Capital and surplus means the sum of the capital and surplus of the insurer required to be shown on the statutory financial statement of the insurer most recently required to be filed with the commissioner;
(7) (A) Cash equivalents means highly rated, highly liquid and readily marketable investments or securities with a remaining term to maturity of one (1) year or less, which includes money market funds as defined in § 56-3-303(a)(17);
(B) For purposes of subdivision (7)(A), highly rated means an investment rated P-1 by Moody's Investors Service, Inc., or A-1 by the Standard and Poor's Division of the McGraw Hill Companies, Inc. or its equivalent rating by a nationally recognized statistical rating organization recognized by the NAIC-SVO;
(8) Collar means an agreement to receive payments as the buyer of an option, cap or floor and to make payments as the seller of a different option, cap or floor;
(9) Counterparty exposure amount means:
(A) For an over-the-counter derivative instrument not entered into pursuant to a written master agreement which provides for netting of payments owed by the respective parties:
(i) The market value of the over-the-counter derivative instrument if the liquidation of the derivative instrument would result in a final cash payment to the insurer; or
(ii) Zero (0) if the liquidation of the derivative instrument would not result in a final cash payment to the insurer;
(B) For over-the-counter derivative instruments entered into pursuant to a written master agreement that provides for netting of payments owed by the respective parties, and the domiciliary jurisdiction of the counterparty is either within the United States, or if not within the United States, is within a foreign, not United States, jurisdiction listed in the Purposes and Procedures Manual of the Securities Valuation Office of the NAIC or, if it is no longer being published, the successor publication to the Purposes and Procedures Manual of the Securities Valuation Office of the NAIC, as eligible for netting, the greater of zero (0) or the net sum payable to the insurer in connection with all derivative instruments subject to the written master agreement upon their liquidation in the event of default by the counterparty pursuant to the master agreement, assuming no conditions precedent to the obligations of the counterparty to make such a payment and assuming no set off of amounts payable pursuant to any other instrument or agreement;
(C) For purposes of this subdivision (9), market value or the net sum payable, as the case may be, shall be determined at the end of the most recent quarter of the insurer's fiscal year and shall be reduced by the market value of acceptable collateral held by the insurer or a custodian on the insurer's behalf;
(10) (A) Derivative instrument means any agreement, option or instrument, or any series or combinations of an agreement, option or instrument:
(i) To make or take delivery of, or assume or relinquish, a specified amount of one (1) or more underlying interests, or to make a cash settlement in lieu thereof; or
(ii) That has a price, performance, value or cash flow based primarily upon the actual or expected price, yield, level, performance, value or cash flow of one (1) or more underlying interests;
(B) (i) Derivative instruments includes options, warrants (not attached to another financial instrument purchased by the insurer), caps, floors, collars, swaps, swaptions, forwards, futures and any other agreements, options or instruments substantially similar thereto, or any series or combinations thereof;
(ii) Derivative instruments does not include collateralized mortgage obligations, other asset-backed securities, principal-protected structured securities, floating rate securities, or instruments that an insurer is otherwise authorized to invest in or receive under this part other than under § 56-3-303(a)(21), and any debt obligations of the insurer;
(11) Derivative transaction means a transaction involving the use of one (1) or more derivative instruments. Dollar roll transactions, repurchase transactions, reverse repurchase transactions and securities lending transactions shall not be included as derivative transactions for purposes of § 56-3-303(a)(21);
(12) Dollar roll transaction means two (2) simultaneous transactions with settlement dates no more than ninety-six (96) days apart so that in one (1) transaction an insurer sells to a business entity, and in the other transaction the insurer is obligated to purchase from the same business entity, substantially similar securities of the following types:
(A) Mortgage-backed securities issued, assumed or guaranteed by the Government National Mortgage Association, the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation or their respective successors; and
(B) Other mortgage-backed securities referred to in § 106 of Title I of the Secondary Mortgage Market Enhancement Act of 1984, codified in 15 U.S.C. § 77r-1;
(13) Equity interests includes common stock, an equity investment in an investment company, other than a money market mutual fund described in § 56-3-303(a)(17), a beneficial interest in a trust or a real estate investment trust, partnership interests, warrants or other rights to acquire equity interests that are created by the person that owns or would issue the equity to be acquired, and equity interests in any business entity, other than preferred stock or shares as described in § 56-3-303(a)(3);
(14) Fixed charges includes interest on all obligations and amortization of debt discount and expenses;
(15) Floor means an agreement obligating the seller to make payments to the buyer in which each payment is based on the amount by which a predetermined number, sometimes called the floor rate or price, exceeds a reference price, level, performance or value of one (1) or more underlying interests;
(16) (A) Foreign investment means an investment in a foreign jurisdiction, or an investment in a person, real estate or asset domiciled in a foreign jurisdiction. An investment shall not be deemed to be foreign if the issuing person, qualified primary credit source or qualified guarantor is a domestic jurisdiction or a person domiciled in a domestic jurisdiction, unless:
(i) The issuing person is a shell business entity; and
(ii) The investment is not assumed, accepted, guaranteed or insured or otherwise backed by a domestic jurisdiction or a person, that is not a shell business entity, domiciled in a domestic jurisdiction;
(B) For purposes of subdivision (16)(A):
(i) Qualified guarantor means a guarantor against which an insurer has a direct claim for full and timely payment, evidenced by a contractual right for which an enforcement action can be brought in a domestic jurisdiction;
(ii) Qualified primary credit source means the credit source to which an insurer looks for payment as to an investment and against which an insurer has a direct claim for full and timely payment, evidenced by a contractual right for which an enforcement action can be brought in a domestic jurisdiction; and
(iii) Shell business entity means a business entity having no economic substance, except as a vehicle for owning interests in assets issued, owned or previously owned by a person domiciled in a foreign jurisdiction;
(17) Foreign jurisdiction means:
(A) A jurisdiction other than a domestic jurisdiction; or
(B) A commonwealth, territory or possession of the United States;
(18) Forward means an agreement, other than a future, to make or take delivery in the future of one (1) or more underlying interests, or effect a cash settlement, based on the actual or expected price, level, performance or value of the underlying interests, but does not mean or include spot transactions effected within customary settlement periods, when-issued purchases or other similar cash market transactions;
(19) Future means an agreement, traded on a futures exchange, to make or take delivery of, or effect a cash settlement based on the actual or expected price, level, performance or value of, one (1) or more underlying interests;
(20) Futures exchange means a foreign or domestic exchange, contract market or board of trade on which trading in futures is conducted and, in the United States, that has been authorized for such trading by the commodities futures trading commission or any successor of the commodities futures trading commission;
(21) Hedging transaction means a derivative transaction that is entered into and maintained to manage:
(A) The risk of a change in the value, yield, price, cash flow or quantity of assets or liabilities, or a portfolio of assets and/or liabilities, that the insurer has acquired or incurred or anticipates acquiring or incurring; or
(B) The currency exchange rate risk related to assets or liabilities, or a portfolio of assets and/or liabilities, that an insurer has acquired or incurred or anticipates acquiring or incurring;
(22) Income generation transaction means a derivative transaction which is entered into to generate income. A derivative transaction which is entered into as a hedging transaction or a replication transaction shall not be considered an income generation transaction;
(23) Investment practices means transactions of the types described in § 56-3-303(a)(10), (15), (18) and (21);
(24) Market value means the price for the security or derivative instrument obtained from a generally recognized source or the most recent quotation from the source or, to the extent no generally recognized source exists, the price for the security or derivative instrument as determined pursuant to the terms of the instrument or in good faith by the insurer as can be reasonably demonstrated to the commissioner upon request, plus accrued but unpaid income on the security or derivative instrument to the extent not included in the price as of the date;
(25) NAIC means the National Association of Insurance Commissioners;
(26) NAIC-SVO means the securities valuation office of the National Association of Insurance Commissioners;
(27) (A) Net earnings available for fixed charges means net income determined on either a consolidated or an unconsolidated basis after allowance for operating and maintenance expenses, depreciation and depletion, and taxes, other than federal and state income taxes, but excluding extraordinary nonrecurring items of income or expense appearing in the regular financial statements of the issuing, assuming or guaranteeing business entity;
(B) In applying tests of net earnings available for fixed charges to an issuing, assuming or guaranteeing business entity or a lessee, whether or not in legal existence during the whole of the test period, that has at or prior to the date of investment by the insurance company acquired the assets of any other business entity by purchase, merger, consolidation or otherwise substantially as an entirety, net earnings available for fixed charges of the predecessor or constituent business entity for such portion of the test period as preceded acquisition may be included in the net earnings of the issuing, assuming or guaranteeing business entity or the lessee, in accordance with the consolidated earnings statement covering the period. The requirements imposed by § 56-3-303(a)(2) and (13) upon the issuing, assuming or guaranteeing business entity of the lessee are deemed to have been met if, at the time the investment is made, a business entity that meets the requirements has guaranteed the indebtedness or has otherwise become obligated to pay amounts that are applicable to the payment of and sufficient to discharge the principal of and interest on the indebtedness in accordance with its terms; provided, that in determining whether the requirements have been met, the pro forma annual interest on the indebtedness is included in the fixed charges of the business entity applicable to the test period in question;
(28) Net earnings available for fixed charges and dividends are determined in the same manner as net earnings available for fixed charges, but after allowance for federal and state income taxes;
(29) Obligation means a note, bond, debenture, trust certificate, equipment trust certificate, production payment, negotiable bank certificate of deposit, bankers' acceptance, asset-backed security, NAIC-SVO credit tenant loan, loan secured by financing a net lease or net leases, and other evidence of indebtedness for the payment of money, or participations, certificates or other evidences of an interest in any of the obligations listed in this subdivision (29), whether constituting a general obligation of the issuer or payable only out of certain revenues or certain funds pledged or otherwise dedicated for payment;
(30) Option means an agreement giving the buyer the right to buy or receive, known as a call option, sell or deliver, known as a put option, enter into, extend or terminate or effect a cash settlement based on the actual or expected price, spread, level, performance or value of one (1) or more underlying interests;
(31) Over-the-counter derivative instrument means a derivative instrument entered into with a business entity, other than through a securities exchange, futures exchange, or cleared through a qualified clearinghouse;
(32) Person means an individual, a business entity, a multilateral development bank or a government or quasi-governmental body, such as a political subdivision or a government sponsored enterprise;
(33) Potential exposure means:
(A) As to a futures position, the amount of initial margin required for that position; or
(B) As to swaps, collars and forwards, one half percent (0.5%) times the notional amount times the square root of the remaining years to maturity;
(34) Preferred dividend requirements means dividends at the maximum prescribed rate on all preferred stock of the same class as that being acquired by the insurance company and on all stock ranking as to dividends on a parity with the dividends or prior to the dividends, whether or not the dividends are cumulative;
(35) Qualified clearinghouse means a clearinghouse subject to the rules of a securities exchange or a futures exchange that provides clearing services, including acting as a counterparty to each of the parties to a transaction such that the parties no longer have credit risk to each other;
(36) Replication transaction means a derivative transaction or combination of derivative transactions effected either separately or in conjunction with cash market investments included in the insurer's investment portfolio in order to replicate the risks and returns of another authorized transaction, investment or instrument and/or operate as a substitute for cash market transactions. A derivative transaction entered into by the insurer as a hedging transaction shall not be considered a replication transaction;
(37) Repurchase transaction means a transaction in which an insurer purchases securities from a business entity that is obligated to repurchase the purchased securities or equivalent securities from the insurer at a specified price, either within a specified period of time or upon demand;
(38) Reverse repurchase transaction means a transaction in which an insurer sells securities to a business entity and is obligated to repurchase the sold securities or equivalent securities from the business entity at a specified price, either within a specified period of time or upon demand;
(39) Securities exchange means:
(A) An exchange registered as a national securities exchange or a securities market registered under the Securities Exchange Act of 1934, compiled in 15 U.S.C. § 78 et seq.;
(B) Private Offerings Resales and Trading through Automated Linkages (PORTAL); or
(C) A designated offshore securities market as defined in Securities Exchange Commission Regulation S, 17 CFR part 230;
(40) Securities lending transaction means a transaction in which securities are loaned by an insurer to a business entity that is obligated to return the loaned securities or equivalent securities to the insurer, either within a specified period of time or upon demand;
(41) State includes the several states, the District of Columbia, the Commonwealth of Puerto Rico and the possessions of the United States;
(42) SVO Rating means the numerical ranking designation of one (1) through six (6) assigned to securities as determined by the NAIC-SVO;
(43) Swap means an agreement to exchange or to net payments at one (1) or more times based on the actual or expected price, yield, level, performance or value of one (1) or more underlying interests;
(44) Swaption means an option to purchase or sell a swap at a given price and time or at a series of prices and times. Swaption does not mean a swap with an embedded option;
(45) Underlying interest means the assets, liabilities or other interests, or a combination of assets, liabilities or other interests, underlying a derivative instrument, such as any one (1) or more securities, currencies, rates, indices, commodities or derivative instruments; and
(46) Warrant means an instrument that gives the holder the right to purchase or sell the underlying interest at a given price and time or at a series of prices and times outlined in the warrant agreement.
[Acts 1907, ch. 458, § 2; Shan., § 3348a29; Code 1932, § 6204; Acts 1935, ch. 105, § 1; 1937, ch. 76, § 1; 1939, ch. 121, § 1; 1945, ch. 106, §§ 1, 2; 1947, ch. 120, § 1; C. Supp. 1950, § 6204; Acts 1951, ch. 77, § 1; T.C.A. (orig. ed.), § 56-217; Acts 1961, ch. 224, § 1; 1961, ch. 229, § 1; 1965, ch. 63, § 1; modified; T.C.A., § 56-306; Acts 1995, ch. 363, § 10; 1998, ch. 678, § 2.]